The dynamics of income diversification in Ethiopia: Evidence from panel data

Block and Webb (2001) in food policy address the issue of the dynamics of livelihood diversification in Ethiopia. Their study uses the ratio of per capita income derived from crops to the sum of all other incomes as an indicator of livelihood diversification for the years 1989 and 1994. Their study focuses only on drought-prone areas during the survey years. The aim of the present study is to explore further the demographic and economic determinants of the dynamics of income diversification using survey data. The data used in this study cover larger and more representative sample and was colleted from rural Ethiopia during 1994 and 1997 harvest years. This study investigates not only the determinants of participation and intensity of off-farm activities, but also factors that affect the dynamics between 1994 and 1997. The results of this study attempt to answer the question: to what extent initial conditions (for instance, asset holdings, production, and crop income) prompt households to diversify to off-farm activities overtime. The results show that participation in off-farm activities is mainly driven by demographic factors, whereas land and other asset ownership as well as crop production and income affect intensity of off-farm activities. The dynamic model results show that farm families who have initially diversified to more off-farm activities subsequently realized less income diversification. Families with more initial crop production from slack harvest season subsequently realized greater income from off-farm activities in 1997. The study also confirms that it is only during slack harvest season that off-farm and on-farm activities are complement each other. JEL Classification: D1, J